6 to reduce debt to 60 of GDP in fifteen years

What will be the path of wealth of the France from the current crisis Behind this question is the formidable issue for public finances.

In the pink scenario, the current crisis is temporary. The economy testified sharply, erasing the recession, to regain its historical trajectory. This is what expresses Christine Lagarde when it wants to differentiate the deficits and the debt crisis of the rest of Eric Woerth when it differentiates the cyclical deficit, the structural deficit. In this pink case, there is not place to seriously change our system: we will live after the crisis as before, with structural deficits to 3 of GDP, but with a public debt increased from 65 to 90 of the GDP.

The grey scenario: after the initial recession of-3, the trajectory of GDP continues without rebound, with growth of 2, but on a parallel and 5 lower than the previous trail (due to-3 of recession in 2009, then the previous trend would have added 2 in 2009).

The black scenario: a strong recession (-3), followed by sustainably lower growth, for example to 1.5 per year instead of 2 previously. After the initial shock, the gap between the pre-crisis trend and the reality departs each year by 0.5 point of GDP.

What is Ms. Lagarde pink scenario is unlikely to occur: a major banking crisis has always permanent adverse effects, destroying finally swathes of sectors previously propelled the financial bubble. Was the case after major banking crises, such as in Scandinavia in the early 1990s and in 1997-1998 East Asian. Seven years after the crisis Scandinavian of 1991, the level of the Sweden GDP was still 5 below historical trend.

Suppose a grey scenario for the France of the future: after 0.4 in 2008,-3 in 2009 and 0.4 in 2010 (official forecast), the average growth of 2 per year from 2011. The level of the France GDP would be permanently anchored at 8 below its historical trend. Deficits (and debt) would explode. Indeed, it is likely that the level of expenditure would remain pegged to the earlier trend (the salaries of civil servants are indexed to inflation, but social spending growing faster than GDP), while the level of revenues would be 8 lower. Knowing that the State marginally tax wealth in 50, a decrease of 8 of potential GDP implies an increase of four percentage points of GDP structural deficits. At add to the structural deficit which was before the crisis, 3 according to my estimates. The conclusion is still terrifying: no radical change of policy, the structural deficits will be 7 (3 4) of GDP to the exit from the crisis - in grey scenario! To return to the (already high) deficits pre-crisis, should reduce public expenditures (including pensions and wages) by 8! If black scenario, it would be obviously worse!

What to do With debt to 90 of the GDP, it takes a deficit of 3.6 of GDP to only to stabilize the debt at this level; and a deficit of 1.6 to reduce debt to 60 of GDP in fifteen years. Of course, must await the end of the recession, but after the reductions in public deficits of the order of 5 points of GDP will need to be implemented, by a combination of lower spending and increase taxes, and this regardless of the color or the inclination of the Government. So far, neither the Government nor the opposition do mention and yet it will be the core of their policies in the years 2010.

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